Are architects obliged to advise on budget? The recent professional indemnity judgment and the implications for duty of care

We review a recent professional indemnity judgment in Riva Properties Ltd and others v Foster + Partners Ltd [2017] EWHC 2574 (TCC) in which the scope of an architect’s duty to take budget into account in producing its design was considered, together with the causative impact of the global financial crisis.

Summary

In a lengthy judgment Mr Justice Fraser found for the claimant, holding that budget is a key constraint which the defendant architect was obliged to identify. The judgment does not, however, change existing law and is based on a fairly unique set of facts.

The judgment also reinforces existing law on other matters, such as the scope of the defendant’s duties to non-contracting claimant companies, and the break in causation as a result of changes in funding post the global financial crisis.

Background

In 2007 Mr Dhanoa, through one of the claimant group of companies, purchased land near Heathrow with the intention of constructing an iconic 500 room 5* hotel on it. Foster + Partners Limited (Foster) was instructed as architects in mid-2007.

The design that Foster produced was complex, involving seven basement levels and a biosphere enclosing the entire hotel. When costed in January 2008, the design came in at £195m.

It was Mr Dhanoa’s case that he originally had a budget of £70m, later increased to £100m, and that he was told by Foster that the design could be value engineered to £100m.

Mr Dhanoa brought a claim against Foster for breach of contract for failing to take into account Mr Dhanoa’s budget in its design, and negligence in failing to advise Mr Dhanoa that it was not possible to value engineer the design down to £100m. He sought damages for (a) abortive professional fees incurred in proceeding with the original design and value engineering exercise, and (b) loss of profits.

The issues

The case raises a number of interesting points for architects, their insurers and those advising them. In particular:

what obligations does an architect have to advise on budget?

did Foster owe a duty of care to the Claimant companies?

what was the impact of the global financial crisis on Mr Dhanoa’s claim?

What obligations does an architect have to advise on budget?

Foster’s case on budget was stark. Despite Foster’s position up to and including at trial that Mr Dhanoa had no budget (or at least none communicated to Foster), this was contradicted by contemporaneous emails and by one of Foster’s key witnesses under cross examination. It was also accepted in cross-examination that Mr Dhanoa had communicated a budget of £70m-£100m.

Foster also submitted that it was not obliged to find out whether or not there was a budget, nor was obliged to provide costs advice, and that Mr Dhanoa’s other requirements - such as wanting an iconic hotel and green credentials - were more important and took precedence over budget.

It was accepted that, as architects, Foster is not a costs specialist and cannot give costs advice. This does not mean, however, that “budget” (as a concept related to cost and outturn cost) had no relevance to Foster at all.

Importantly, it was found that Foster had failed to identify a fundamental and critical constraint, namely the budget, and that such a duty arose from the RIBA Job Book which specifically identified cost is a key constraint that should be ascertained and considered at Stage A and B of the RIBA Work Stages. The obligation to understand whether or not there is a budget was accepted by both architectural experts as being a key constraint to be taken into account. In this respect, Foster’s breach lay in ignoring this constraint in producing its design.

Foster’s errors were compounded by its actions following the costing of the design in January 2008, which revealed the £195m price tag. Mr Justice Fraser accepted as a matter of fact that at this point Foster advised Mr Dhanoa that the project could be value engineered down to £100m. Whilst it was acknowledged that a value engineering exercise is not a guarantee, as this can be a complex process, Foster’s own expert found that it should have been “blindingly obvious” that a value engineering exercise of this scale was impossible and Foster should have advised as such.

Did Foster owe a duty of care to the Claimant companies?

A further issue before the Court was whether the architects owed a duty of care to the claimants’ group companies. Mr Dhanoa had the right to call for collateral warranties from the architects to the group companies or to assign the benefit of the appointment in their favour but did not do either, so there was no contractual link between the architects and the group companies. The court applied the test from Caparo Industries v Dickman [1990] 2 WLR 358 and found that no duty of care was owed.

What was the impact of the global financial crisis on Mr Dhanoa’s claim?

There is still no hotel on the site and the Court was required to consider a number of causation points raised by Foster. Mr Justice Fraser found that there were three factors which prevented the construction:

the financial crisis which made it more difficult for Mr Dhanoa to borrow the sums needed

a decrease in the LTV value lenders were willing to accept as a result of the crisis and the lack of cash reserves available to Mr Dhanoa, and

the cost of the Foster scheme which caused difficulties in putting a viable proposal to lenders to obtain funds.

While it was accepted that an alternative scheme could have been constructed for £100m and still providing a 500 room 5* hotel, Mr Dhanoa would have been unable to obtain funds in any event owing to the first two of the factors mentioned above. Alternatively, the inability of Mr Dhanoa to obtain funding as a result of the financial crisis was not a type of harm from which Foster had a duty to keep the Claimant harmless (ie following the SAAMCO principle).

A further causation point advanced by Foster - that the costings provided by the Claimant’s costs engineers after the commencement of the value engineering exercise was an intervening act - was rejected as it was found that Claimant was still entitled to rely on Foster’s representations that the design could be delivered in budget.

Accordingly, the Claimant was entitled to recover £3.6m in abortive professional fees and costs incurred as a result of Foster’s breach of contract in producing the £195m design and costs associated with proceeding with the value engineering exercise (including applying for planning permission), but was not entitled to recover the larger claim for £16m in respect of loss of profits.

Observations

While at first glance this case could cause concern among architects, the judgment, once fully digested, is less alarming than it may appear.

The position taken by Foster, both during the project (by ignoring the budget communicated to them) and then at trial (in maintaining the position that budget equates to costs, and costs are nothing to do with them) could be said to appear unattractive. Attempts to discredit Mr Dhaona may not have assisted. Even Foster's own expert conceded that the budget (or the lack of one, if it is to be purely “design led”) is a relevant constraint and must form part of the scoping process. There was a vast discrepancy between the figures ie a build cost of £195m vs. a budget of £70m-£100m, and the value engineering exercise was accepted as being plainly impossible.

The judgment reinforces the need for architects to take budget into account in scoping and designing a project. Architects should seek to understand the client’s budget, and to produce a design that they believe to be in accordance with this. If, when costed, the design then exceeds the budget, then there are likely to be questions as to what was communicated to the architect, but this judgment does not mean that the architect will necessarily have been negligent. The Foster decision arises out of a very specific and stark set of facts.

The way matters proceeded at trial in this case should also serve as a reminder to litigants and to their counsel that factual and expert witnesses should be properly and robustly challenged on their evidence well in advance of trial; the revelation of truths that do not help your (or your client’s) case is far better done behind closed doors than at trial. It also sounds a cautionary note about adopting what is almost inevitably a high risk strategy, in seeking to tar your opponent’s witnesses.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.

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